Collar Calculations Using the BCI Trade Management Calculator – September 18, 2023
The Collar Strategy is a covered call writing-like strategy where a protective put is added to the trade, thereby establishing a floor and a ceiling with a maximum gain and a maximum loss. This article will demonstrate how we can use our BCI Trade Management Calculator (TMC) to enter, generate initial returns, manage our trades and receive final results from 3 perspectives. We will accomplish this by deducting the put debit from the call credit resulting in a net option credit to make the strategy profitable.
3 legs of a collar trade
- Long stock (buy the shares first)
- Short (covered) out-of-the-money call (ceiling)
- Long out-of-the-money protective put (floor)
Real-life example with Salesforce, Inc. (NYSE: CRM) collar trade on 4/19/2023
- 4/19/2023: Buy 100 x CRM at $197.60
- 4/19/2023: STO 1 x 5/19/2023 $200.00 call at $5.15
- 4/19/2023: BTO 1 5/19/2023 $190.00 put at $2.99
CRM option-chain on 4/19/2023
CRM calculations for covered call trade only
- Brown cells: 2.61% 31-day initial which annualizes to 30.69%
- Yellow cell: The breakeven price point ($192.45)
- Pink cell: Upside potential if sharer price accelerates to the OTM call strike (1.21%)
CRM collar calculations deducting the put debit from the call credit ($5.15 – $2.99)
- Brown cells: 1.09% 31-day initial which annualizes to 12.87%
- Yellow cell: The breakeven price point ($195.44)
- Pink cell: Upside potential if sharer price accelerates to the OTM call strike (1.21%)
3 major outcomes at expiration
The TMC will calculate the following 3 scenarios:
- Brown cells: Stock price > $200.00 (above OTM call strike)
- Yellow cells: Stock price = $197.60 (no change)
- Pink cells: Stock price < $190.00 (below OTM put strike)
The spreadsheet shows a maximum 31-day return of 2.31%, a maximum loss of 2.75% and a gain of 1.09% if share price remains the same.
Discussion
Our collar trades can be managed by the BCI Trade Management Calculator (TMC) by deducting the put premium debit from the call premium credit. We can establish both initial and final calculations using this spreadsheet.
Author: Alan Ellman